Victor Jacobowitz (pictured, centre) was born in New York in 1932. He took over Allou Healthcare with two of his sons, Herman and Jacob, in 1985, before floating it on the stock exchange four years later. In the three decades following the purchase, the Jacobowitzes built it up into one of the largest distributors of health and beauty products in the United States, with a particular focus on perfume. By 2002, Allou reported net income of $6.6m on sales of $564m and employed more than 300 people, with warehouses in New York, Florida and California.
What was the scam?
From the 1990s onward, Allou had an agreement with lenders that allowed it to borrow up to 60% of its inventory and 80% of its invoices. This enabled it to start systematically inflating both its sales and its inventory by engaging in phoney transactions with independent companies owned by the Jacobowitz family, in order to borrow increasing amounts of money. Most of this money was used to aid the fraud, but some of it was skimmed. By 2002 a third of reported sales were fraudulent. To keep investors satisfied, accounts were also falsified to give the impression that the company was profitable.
What happened next?
By 2002 the gap between reported and actual inventory had become too great to hide. The cost of the accumulated borrowing also meant that the company was hopelessly insolvent. The family decided to burn down the main warehouse in New York and then claim on the insurance. However, the subsequent fire was ruled to have been started deliberately and when they attempted to bribe the fire marshalls, the police were notified. By 2003 the firm was declared bankrupt and several people involved in the fraud (including Herman and Jacob) were jailed.
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Lessons for investors
The courts attempted to seize the defendants' property to repay Allou's debts, but lenders still lost an estimated $177m. Its shareholders ended up wiped out. In order to prevent its scam from being discovered, Allou regularly changed its auditors, with three (Mayer Rispler, Arthur Andersen and KPMG) taking the job over three years. Companies do occasionally switch auditors from time to time for various legitimate reasons, but several changes in such a short period are definitely a red flag that things are not what they seem.
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